Highlights:
- The ECB will cut the deposit rate by 25bp at this week’s meeting, but is not expected to show any signs of pre-commiting to another cut in October.
- Equity rally provides stability in G10 FX, with ranges remaining contained so far.
- Aside from the ECB, US PPI data and initial jobless claims highlight the economic calendar.
US TSYS: Lower Across the Curve, Mostly Within CPI Range
- Treasuries have sold off across the curve, remaining within yesterday’s CPI-induced lows through 2-10Y benchmarks but with 30s breaking lower.
- PPI and jobless claims at 0830ET headline the session but there is 30Y supply also on the docket. The week's coupon issuance has been digested well, with 3s trading through by 1.6bps and 10s yesterday trading through by 1.4bps.
- Cash yields are broadly 2.5bp higher on the day.
- 2s10s at 1.2bps remains in positive territory but holds yesterday’s flattening for a little further off recent highs of ~8bps.
- TYZ4 is at 115-06 (-04+) on reasonable cumulative volumes of 315k, but remains within yesterday’s post-CPI low of 115-02. Firmer support is seen at 114-27+ (Sep 10 low) before 114-10 (20-day EMA).
- Data: PPI inflation Aug (0830ET), Weekly jobless claims (0830ET), Household chg in net worth Q2 (1200ET), Monthly budget statement Aug (1400ET but Bloomberg already shows as released)
- Note/bond issuance: US Tsy $22B 30Y Bond auction re-open - 912810UC0 (1300ET)
- Bill issuance: US Tsy $80B 4- & 8W bill auctions (1130ET)
STIR: Consolidating Post-CPI Moves But Still 105bp of Cuts to Year-End
- Fed Funds implied rates hold or have modestly extended yesterday’s increase on the CPI report with its strong rental inflation components.
- Cumulative cuts from 5.33% effective: 28.5bp Sep, 65bp Nov, 105bp Dec, 141bp Jan and 219bp June.
- It sees a 25bp cut next week as increasingly locked in (28bp priced by 32bp pre-CPI and 37bp pre-Waller) but there is still a path of heavy rate cuts further out.
- Incremental cut pricing of 37/39/37bp cuts for Nov/Dec/Jan meetings compare with 40/41/39bp pre-CPI.
- Today’s 0830ET data are the main risk events, with PPI watched for the usual PCE implications and likely continued sensitivity to weekly jobless claims.
STIR: Longs Cut in Front End of SOFR Strip Post-CPI, Shorts Set Further Out
Preliminary OI data points to long cover dominating in the very front end of the SOFR strip as yesterday’s CPI data prompted an unwind of positions looking for a 50bp Fed cut later this month, while short setting dominated further out.
- A reminder that several banks removed their calls for 50bp cuts at the upcoming FOMC decision in the wake of the data.
- Fedspeak and our DC policy team’s work had already pointed to a more gradualist approach to easing.
- We flagged the risk to existing long positioning ahead of the data.
| 11-Sep-24 | 10-Sep-24 | Daily OI Change |
| Daily OI Change In Packs |
|---|---|---|---|---|---|
SFRM4 | 1,131,309 | 1,131,474 | -165 | Whites | -32,618 |
SFRU4 | 1,297,502 | 1,344,119 | -46,617 | Reds | +66,436 |
SFRZ4 | 1,238,748 | 1,249,721 | -10,973 | Greens | +20,050 |
SFRH5 | 1,011,362 | 986,225 | +25,137 | Blues | +8,270 |
SFRM5 | 901,907 | 881,313 | +20,594 |
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SFRU5 | 760,832 | 744,643 | +16,189 |
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SFRZ5 | 952,674 | 921,105 | +31,569 |
|
|
SFRH6 | 625,239 | 627,155 | -1,916 |
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SFRM6 | 606,513 | 606,869 | -356 |
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SFRU6 | 542,966 | 540,034 | +2,932 |
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SFRZ6 | 540,856 | 531,871 | +8,985 |
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SFRH7 | 331,101 | 322,612 | +8,489 |
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SFRM7 | 304,844 | 300,241 | +4,603 |
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SFRU7 | 231,359 | 225,524 | +5,835 |
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SFRZ7 | 220,249 | 222,774 | -2,525 |
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SFRH8 | 169,425 | 169,068 | +357 |
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US TSY FUTURES: OI Points to Mix of Short Setting & Long Cover on Wednesday
Preliminary OI data points to short setting dominating in Tsy futures on Wednesday, with pockets of long cover (FV & WN) also noted.
- In line to slightly firmer-than-expected U.S. CPI data, along with a recovery rally in both equities and oil, provided most of the pressure.
| 10-Sep-24 | 09-Sep-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
|---|---|---|---|---|
TU | 4,339,267 | 4,310,811 | +28,456 | +1,129,502 |
FV | 6,356,393 | 6,356,550 | -157 | -7,009 |
TY | 4,775,203 | 4,729,408 | +45,795 | +3,099,213 |
UXY | 2,105,853 | 2,093,642 | +12,211 | +1,150,943 |
US | 1,725,680 | 1,711,998 | +13,682 | +1,932,073 |
WN | 1,689,810 | 1,701,402 | -11,592 | -2,611,338 |
|
| Total | +88,395 | +4,693,384 |
MNI ECB PREVIEW: September Cut, October Pause
- The ECB will cut the deposit rate by 25bp at this week’s meeting.
- Having previously indicated that the trajectory for policy rates is lower provided that incoming data supports the baseline scenario, the weakening growth outlook and signs of moderating wage pressure provide sufficient cover for the ECB to cut.
- We would not expect any signs of the ECB pre-committing to another cut in October as with inflation close to target there is no urgency to do so. Moreover, indications of back-to-back cuts would undermine President Lagarde’s previous assertion that policy rates will not necessarily move lower in a linear fashion, in turn triggering a dovish re-pricing that would be at odds with the ECBs cautious approach to normalisation.
- For the full publication, please see here.
MNI US INFLATION INSIGHT: 25bp Cut Looks Locked In
- Core CPI inflation was easily stronger than expected in August at 0.28% M/M (cons 0.2) after 0.165% M/M.
- Rental inflation surprised higher for a second month running, this time with the particularly heavily-weighted OER category at 0.50% M/M vs expectations of 0.3.
- Core services ex-housing was right at the high end of analyst expectations but with possibly a weaker read-through to its PCE counterpart.
- To be revised after Thursday’s PPI report, initial tracking estimates put core PCE at 0.17% M/M in August.
- This, along with core CPI slowing to 2.7% annualized over the last six months, should continue to give the Fed confidence that inflation appears to be on a bumpy disinflation path.
- However, rental inflation has only seen one month back at pre-pandemic averages, and that was in June, which makes it harder to argue cutting in larger-than-25bp clips at this juncture, especially in tandem with latest labor market data.
- Fed Funds have continued to zero in on a 25bp cut next week, as we have argued for some time, with 28bp priced vs 32bp prior to CPI and 37bp prior to Governor Waller’s remarks last week. There are however still more than 100bp of cuts priced over the three meetings left this year (including next week’s).
- Focus will continue to remain on the labor market in the near-term.
- Please find the full report here.
FOREX: 0.8400 Providing Solid Base for EURGBP, Yield Differential Moves Supporting
The post-election bid for GBP has been tempered in recent weeks, with stretched long positioning and questions surrounding “pro-growth” Labour policy acting as moderate headwinds for sterling.
- Downside for equities in early September (negative seasonals in play) may also be weighing on GBP given its higher beta to stocks.
- Yield differentials have also become a little less favourable for GBP longs since the start of the month, as dovish moves in medium-term BoE pricing have outstripped that seen for the ECB (see the SONIA/Euribor Dec ’25 spread in the chart below).
- Accordingly, EUR/GBP has been drifting higher, with moves sub 0.8400 failing to ignite further downside momentum this year.
- Trendline support off the 2022 lows also now intersects around the 0.8400 mark. Resistance levels of note are 0.8470, the 50-day EMA and 0.8494, the Aug 26 high.
- While longer term relative growth expectations, the BoE’s lack of commitment to follow up rate cuts and stickier UK inflation all point to further downside for EUR/GBP, the factors flagged above remind us that any such moves are unlikely to come in a straight line.
- A break of 0.8400 and key support at 0.8383, the Jul 17 low, would be required to resume the medium-term technical downtrend.
Figure 1: SONIA/Euribor Dec '25 Implied Rate Spread
Source: MNI, Bloomberg
FOREX: Equity Rally Provides Stability in FX, Ranges Remained Contained
- The impressive recovery for major equity benchmarks late Wednesday and subsequent consolidation at the highs this morning has provided a sense of calm across currency markets. In line with this sentiment the Japanese yen is softer on the day, and USDJPY currently trades in the middle of its relatively contained 80 pip range, after rising as high as 143.04 in early European trade.
- In similar vein, both EURCHF and USDCHF are around 0.25% higher today, as bullish positions against funding currencies renews its appeal.
- EURUSD trades within an 18 pip range ahead of today’s ECB decision and press conference, with a deposit rate cut of 25bp well baked in to expectations.
- We would not expect any signs of the ECB pre-committing to another cut in October as with inflation close to target there is no urgency to do so. Moreover, indications of back-to-back cuts would undermine President Lagarde’s previous assertion that policy rates will not necessarily move lower in a linear fashion.
- With the bar for any meaningful surprises particularly high, single currency volatility is likely to remain low, with this view emboldened by the impressive 13.5bn of options rolling off between 1.0945/1.1055 at today’s NY cut.
- Standing out in emerging markets, the South African rand is lower on the session after failing to capitalise on the recovery in equities. USDZAR is +0.5% on the session with a survey showing inflation expectations declining further providing support.
- Aside from the ECB, US PPI data and initial jobless claims highlight the economic calendar.
EUROPEAN ISSUANCE UPDATE
UK tender results:
- High bid-to-cover of 4.17x for the gilt tender this morning - although this should be higher than a normal auction due to the smaller size.
- The tail of 0.9bp isn't particularly tight, but there is not really much precedent for anything sub-2 year being sold in the UK - and with it being a tender there was no non-competitive offering today.
- No notable price impact following the tender.
- GBP2bln of the 0.125% Jan-26 Gilt. Avg yield 355.9% (bid-to-cover 4.17x, tail 0.9bp).
Ireland auction results:
- E300mln of the 1.35% Mar-31 Green IGB. Avg yield 2.264% (bid-to-cover 4.43x).
- E700mln of the 2.60% Oct-34 IGB. Avg yield 2.504% (bid-to-cover 2.88x).
Italy auction results:
- E3.5bln of the 3.45% Jul-27 BTP. Avg yield 2.62% (bid-to-cover 1.60x).
- E3bln of the 3.45% Jul-31 BTP. Avg yield 3.15% (bid-to-cover 1.86x).
EQUITIES: Wednesday Rally Signals Possible Bullish Reversal for E-Mini S&P
- Despite a short-term bounce, Eurostoxx 50 futures continue to trade closer to their recent lows. The latest move down has resulted in a break of both the 20- and 50-day EMAs. A resumption of the bear leg would signal scope for weakness towards 4686.53, a Fibonacci retracement point. Initial key short-term resistance has been defined at 4998.00, the Sep 3 high. First resistance is at 4867.99, the 50-day EMA.
- A volatile and bullish session in S&P E-Minis yesterday, highlights a possible bullish reversal and the end of the corrective cycle between Sep 3 - 6. The contract is trading above the 20- and 50-day EMAs and a continuation higher would signal scope for a climb towards 5669.75, the Sep 3 high. On the downside, a reversal lower and a breach of 5394.0.00, the Sep 6 low, would reinstate a bearish theme.
COMMODITIES: Gold Continues to Trade in Tight Range, Still Close to Recent Highs
- WTI futures remain in a bearish condition. Tuesday’s strong sell-off reinforces current conditions and confirmed an extension of the bear cycle. This also maintains the price sequence of lower lows and lower highs. A continuation lower would open $63.93 next, a Fibonacci projection point, ahead of the psychological $60.00 handle. Short-term gains would be considered corrective. Firm resistance is at $71.56, the 20-day EMA.
- Gold continues to trade inside a range but remains closer to its recent highs. The trend condition is unchanged and the primary direction remains up. Note too that moving average studies are in a bull-mode set-up, highlighting a dominant uptrend. Sights are on $2536.4 next, a Fibonacci projection. The 20-day EMA has recently been pierced. The next firm support to watch is $2453.4, the 50-day EMA. Short-term weakness is considered corrective.
MNI (LONDON)
| Date | GMT/Local | Impact | Country | Event |
| 12/09/2024 | 1215/1415 | *** |  EU | ECB Deposit Rate |
| 12/09/2024 | 1215/1415 | *** | EU | ECB Main Refi Rate |
| 12/09/2024 | 1215/1415 | *** | EU | ECB Marginal Lending Rate |
| 12/09/2024 | 1230/0830 | *** |  US | Jobless Claims |
| 12/09/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
| 12/09/2024 | 1230/0830 | *** | US | PPI |
| 12/09/2024 | 1230/0830 | * |  CA | Building Permits |
| 12/09/2024 | 1230/0830 | * | CA | Household debt-to-income |
| 12/09/2024 | 1245/1445 | EU | ECB Monetary Policy Press Conference | |
| 12/09/2024 | 1345/1545 | EU | Eurosystem staff macroeconomic projections publications | |
| 12/09/2024 | 1415/1615 | EU | ECB Podcast: Lagarde presents the latest monetary policy decisions | |
| 12/09/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
| 12/09/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 12/09/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 12/09/2024 | 1600/1200 | *** | US | USDA Crop Estimates - WASDE |
| 12/09/2024 | 1700/1300 | *** | US | US Treasury Auction Result for 30 Year Bond |
| 12/09/2024 | 1800/1400 | ** | US | Treasury Budget |
| 13/09/2024 | 0430/1330 | ** |  JP | Industrial Production |
| 13/09/2024 | 0645/0845 | *** |  FR | HICP (f) |
| 13/09/2024 | 0830/0930 | ** |  GB | Bank of England/Ipsos Inflation Attitudes Survey |
| 13/09/2024 | 0900/1100 | ** | EU | Industrial Production |
| 13/09/2024 | - | *** |  CN | Money Supply |
| 13/09/2024 | - | *** | CN | New Loans |
| 13/09/2024 | - | *** | CN | Social Financing |
| 13/09/2024 | - | EU | ECB's Lagarde in Eurogroup meeting | |
| 13/09/2024 | 1230/0830 | ** | US | Import/Export Price Index |
| 13/09/2024 | 1230/0830 | ** | CA | Wholesale Trade |
| 13/09/2024 | 1400/1000 | ** | US | U. Mich. Survey of Consumers |
| 13/09/2024 | 1700/1300 | ** | US | Baker Hughes Rig Count Overview - Weekly |
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